Difference in natural resources and other tangible assets, Public Economics

Difference in Natural Resources and Other Tangible Assets

The difference in the treatment of natural resources and other tangible assets provides false signals to policymakers. It reinforces the false dichotomy among the economy and the environment that leads policymakers to ignore or destroy the latter in the name of economic development. It perplexes the depletion of valuable assets with the generation of income. So it promotes and seems to validate the idea that rapid rates of economic growth can be achieved and sustained by exploiting the resource base. The effect can be illusory gains in income and permanent losses in wealth.

Indeed, natural resource assets are legitimately drawn upon to finance economic growth, particularly in resource-dependent countries. The revenues derived from resource extraction are used to finance investments in infrastructure, industrial capacity, and education. A reasonable accounting representation of the process, though, would make out that one kind of asset has been exchanged for another that is supposed to yield a higher return. For example, consider the case of a farmer who cuts and sells the timber in his woods to raise money for a new barn. His private accounts would reflect the acquisition of a new asset, the barn, and the loss of an old asset, the timber. He thinks himself better off because the barn is worth more to him than the timber. In the national accounts, though, income and investment would rise as the barn is built, but income would also rise as the wood is cut. The value of the timber, less that of any intermediate purchases (e.g., gas and oil for the chainsaw) would be credited to value added in the logging industry.

As per the present national accounting system, nowhere is the loss of a valuable asset reflected. This can lead to serious miscalculation of the development potential of resource-t economies by confusing gross and net capital formation. Even worse, should the proceeds of resource depletion be used to finance current consumption, and then the economic path is ultimately unsustainable, whatever the national accounts say. If the same farmer used the proceeds from his timber sale to finance a winter vacation, he would be poorer on his return and no longer able to afford the bam, but the national income would only register a gain, not a loss in wealth. In the present world many of the resource-dependent economies are heavily burdened with debt. For example, Mexico, Venezuela and Nigeria are oil exporters. Their national balance sheets before the debt crisis deteriorated substantially as they drew down natural resource assets and piled up external debt, using the proceeds of both to finance consumption and subsidize investments of little or no economic value. A national accounting system that drew attention to their deteriorating asset positions might have alerted policy-makers to the need for policy changes and international lenders to the growing risks of further exposure.

The fundamental definition of income encompasses the notion of sustainability. In accounting and in economics textbooks, income is defined as the maximum amount that the recipient could consume in a given period without reducing the amount of possible consumption in a future period. This income concept encompasses not only current earnings but also changes in asset positions: capital gains are a source of income, and capital losses are a reduction in income. The depreciation accounts reflect the fact that unless the capital stock is maintained and replaced, future consumption possibilities will inevitably decline. In resource-dependent countries, failure to extend this depreciation concept to the capital stock embodied in natural resources, which are such a significant source of income and consumption, is a major omission and inconsistency. For resource - based economies, evaluations of economic performance and estimates of macroeconomic relationships are seriously distorted by failure to account for natural resource depreciation.